Graphically analyse the effect of a sudden change in the international price of oil for Canadian economy noting that in case of Canada oil is both an export item and an input in many production processes. Your graphs should include analysis of shifts in AE andlar AD andlor AS. Consider an increase in the internationalprice ofoil. First, notice that oil is not a final good produced in Canada, as consumers to do not consume it directly. So, it's price is not represented in the price level, which is the price of allfinal goods and services produced domestically, and will not therefore directly impact it {cause it to change}. Second, notice that oilprices s are determined internationally, meaning that we think about the oil market as one in which world demand and supply will determine the price at which all buyers and sellers trade oil. Therefore, an increase in price of oil at the international level means the price of all exporters is increasing fi.e., there is no cheaper seller available for buyers to switch too]. As a result, every exporter's income will rise given that demand for oil is resistant to change in the shortrun {since it is still the m afar source of energy in every economy}. So, as price of oil increases, demand for oil does not decrease in the short-run. The increase in the price ofoil will affect Canadian economy through two channels: i. Given that Canada exports oil, an increase in price of oil increases the value of Canadian oil exports . This will shift AE up and consequently AD to the right {AD level to YD\"), at the inltialprlce level P0\" {blue arrows). ii. At the same time, since oil is a major input in many production processes in Canada, the increase in price of oil will raise the unit-cost of production above the initial price level Pa\" and leads to a shift in the AS curve to the left (and AS level to Yl'j. {red arrow) These two processes will generate an excess demand of goods and services of the size (1'1\"- Yf} at the initial price level Pa\". The excess demand willcause the price level to increase until the excess demand {the source of change in the price level] disappears at a price level like P1\